There are many hypothetical and examples of comparative advantage in the real world. Below are examples of either scenario:
Country A produces 6 billion kg of beef and 3 billion kg of mutton. Another Country, Y, produces 4 billion kg of beef and 3 billion kilograms of mutton. If these two countries were to specialize, one would forego beef production, and another would forego mutton production.
Per unit opportunity cost would be the determinant of which commodity each country has to forego, as shown below:
|Country A (billion kilograms)||Per Unit Opportunity Cost||Country Y (billion kilograms)||Per Unit Opportunity Cost|
|Beef||6||3/6 = 1/2||4||3/4 = ¾|
|Mutton||3||6/3 = 2||3||4/3 = 11/3|
How Do You Determine Who Has the Comparative Advantage?
Assume that Country A decided to specialize in beef production, i.e., 6 billion kilograms. In such a decision, Country A would forego producing 3 billion kilograms of mutton. The per unit opportunity cost for beef would be ½ (3/6). If the Country decided to specialize in mutton, per unit opportunity cost would be 2 (6/3.)
For Country Y, the per unit opportunity cost for a decision to produce beef only would be ¾. If Country Y decides to forego beef production, per unit opportunity cost for mutton would be 11/3.
The per unit of both beef and mutton for both countries is as follows:
|Country A per unit opportunity cost||Country Y per unit opportunity cost|
|Beef||½ = 0.5||¾ = 0.75|
|Mutton||2||11/3 = 1.33|
In beef specialization, Country A has the lowest opportunity costs, 0.5. It sacrifices only half of the production of mutton. For Country A, its beef specialization would mean it is foregoing ¾ of mutton production cost. Thus, Country A has a comparative advantage in beef production over Country Y.
On the other hand, Country Y has the lowest opportunity costs in mutton specialization, 1.33, hence the comparative advantage.
Country A should specialize in beef, and Country Y should specialize in mutton for trading purposes. This is a win-to-win scenario for both countries as each would have the lowest opportunity costs for the foregone option.
Real Life Examples of Comparative Advantage
The United States and European Union are trading partners with many opportunities of leveraging comparative advantage. US and EU are regions with examples of comparative advantage in the real world due to their inter-trade of machinery and vehicles, and chemicals. The best way to compare inter-trade between EU and the US is to use the Standard International Trade Classification (SITC) product group.
In 2021, European Union exported €147,779.33 million worth of machinery and vehicles to the United States. The United States exported €81,632.74 million worth of machinery and vehicles to the European Union in the same year.
The United States exported chemicals worth €58,309.1 million to European Union in 2021. On the other hand, European Union exported chemicals worth €115,827.04 million to the United States.
A comparative advantage between the United States and European Union would require one only to produce and export chemicals while the other produce and export machinery and vehicles. Who should export what?
|European Union Exports “millions”||Per Unit Opportunity Cost||USA Exports “millions”||Per Unit Opportunity Cost|
|Machinery and vehicles||€147,779.33||0.78||€81,632.74||0.71|
In chemicals exportation, EU has the lowest per unit opportunity costs of machinery and vehicles, i.e., 1.27. European Union would have a comparative advantage if it exported chemicals to the United States without taking in any imported chemicals from the United States. This is because the United States has a slightly higher per unit opportunity cost of 1.4 in exporting chemicals.
In the exportation of machinery and vehicles, the United States has the lowest per unit opportunity costs of 0.71. It, therefore, has a comparative advantage in exporting machinery and vehicles.
Thus, examples of comparative advantage in the real world would be when EU exports chemicals to the US, and the US exports machinery and vehicles to the EU without counter-trade on both commodities.